Executive Summary:
The Mills Act was adopted by the State of California in 1972. The City of Carmel-by-the-Sea adopted a Mills Act program as part of the Local Coastal Program in 2004. The Council last discussed the City’s Mills Act Policy on October 4, 2022 and April 4, 2023; following a review of the existing Policy, review of various policy approaches practiced by jurisdictions across the State, and discussion of possible modifications at the April 4, 2023 Council Meeting, the Council declined to pursue any changes to the City’s Mills Act Policy. In response to Council direction received on October 3, 2023, this staff report includes information on the Policy’s financial impacts to the City (see “Fiscal Impact” section). The staff report also includes policy information previously provided to the Council in October, 2022 and April, 2023 as context. Lastly, this staff report discusses the issue of rehabilitation/maintenance work completed within one year prior to contract finalization; while the Mills Act program is intended to be an incentive to complete future, planned work, there may be instances where the Council may wish to consider recently rehabilitated properties. Staff is seeking guidance from the Council on Policy modifications, if desired.
Background/Summary:
BACKGROUND
The Mills Act was adopted by the State of California in 1972, and continues today as California’s most important economic incentive program for the restoration and preservation of qualified historic buildings by private property owners. Mills Act legislation grants participating local governments (cities and counties) authority to enter into contracts with owners of qualified historic properties who actively participate in the restoration and maintenance of their historic properties while receiving property tax relief. California’s four largest cities (Los Angeles, San Diego, San Francisco, and San Jose) as well as more than 75 other city and county governments have instituted Mills Act programs. A list of communities participating in the Mills Act Program is available online at http://www.ohp.parks.ca.gov/default.asp?page_id=21412.
The City of Carmel-by-the-Sea adopted a Mills Act program as part of the Local Coastal Program in 2004, and since then has entered into new contracts with private property owners on a near-yearly basis. The property owner benefits from a reduction in property taxes, while the City benefits from having historic resources rehabilitated, maintained, and preserved.
Properties must be included on both the Carmel Historic Inventory and the Carmel Register of Historic Resources prior to being eligible for a Mills Act contract. To be listed on the Carmel Historic Inventory, an assessment of historical significance must be conducted to determine whether the property is eligible. Eligible properties are those which represent at least one theme in the City’s Historic Context Statement; retain substantial integrity; are at least 50 years of age; are associated with significant events or people; embody distinctive characteristics; or yield information important to prehistory or local, state, or national history. To be listed on the Carmel Register, a property owner must submit a request in writing and their request must be approved by the Historic Resources Board. Listing on the Register provides benefits such as waiver of on-site parking requirements; preservation of existing non-conformities; Federal rehabilitation tax credits; building permit fee reduction of 25%; and, participation in the Mills Act program.
In addition to being listed on the Carmel Historic Inventory and the Carmel Register, a property must be preserved in its historic size, form and design without significant alterations or additions. More specifically, any future addition or alteration must comply with the Secretary’s Standards for the Treatment of Historic Properties. Alterations cannot alter, damage, or diminish any primary elevation or character-defining feature; additions cannot increase the floor area by more than 15 percent beyond the amount established in the documented original or historic design; and, additions cannot result in a second-story addition to a single-story historic resource. These limitations apply to both past and planned work.
Mills Act Policy
The City’s current policy regarding Mills Act contracts allows for up to fifteen new contracts to be approved over a three-calendar year period (Attachment 1, Resolution 2016-068). The policy was reviewed by the City Council on March 3, 2020 and no changes were made at that time. The policy was again reviewed by the City Council on October 4, 2022 and April 4, 2023, and no changes were made at that time.
The City currently has 15 active contracts. The two calendar years during which the most Mills Act contracts were approved occurred in 2016 and 2022 when a total of 4 contracts were approved each year. In 2022, the City approved the first Mills Act contract for a commercial property, the Carmel Beach Hotel & Spa (formerly known as the Colonial Terrace Inn). In April 2023, the City entered into the second Mills Act contract for a commercial property: L’Auberge (formerly known as the Sundial Inn).
On October 4, 2022, the City Council discussed potential amendments to the Mills Act policy. The 2022 discussion revealed general Council support for the program, with recognition of the community benefit resulting from the preservation and maintenance of historic properties. However, some Council members expressed a desire to reconsider the length of the contract, limit the number of active contracts at any given time, and consider a dollar value cap on the tax break. Additionally, a concern was raised about high revenue-generating commercial properties receiving a 20-year tax reduction. The summary of each of these topics provided to Council on April 4, 2023 is provided below; ultimately the Council determined on April 4, 2023 not to change the contract length or issue notices of nonrenewal, and not to place limits on the annual number of contracts, assessed valuation, land use type or annual tax revenue loss.
Length of Contracts & Notices of Nonrenewal
The 2022 Council discussion on length of contracts and Notices of Nonrenewal raised questions of whether or not the contracts should be endless, or if they should have a hard end date before a re-application is needed.
In 2020, the City Attorney worked with City staff to review the contract language to ensure the contract is consistent with State law and our local Mills Act program. On March 3, 2020, the City Council approved the standard contract language (Attachment 2). In accordance with State law, the term of the contract is 10 years. Each year on the anniversary date of the contract, one year is automatically added to the term of the contract. This creates a rolling 10-year contract that automatically renews until such time that either the City or the property owner provides a written notice of non-renewal. Essentially, each January 1st, the 10-year contract restarts.
If the City desires to end a contract, the City must provide the property owner with written notice of non-renewal at least 60 days prior to the annual renewal date. Property owners who desire to end a contract must give written notice to the City at least 90 days prior to the annual renewal date. If a notice of non-renewal is provided, the agreement will expire 9 years from the renewal date of the following January 1st. An example is provided below:
The City enters into a Mills Act Contract on January 1, 2012. The term of the contract is 10 years. The contract expires on December 31, 2021.
On the first anniversary date of the contract, January 1, 2013, one year is automatically added to the contract term. The new contract expiration date is December 31, 2022.
On the second anniversary date of the contract, January 1, 2014, one year is automatically added to the contract term. The new contract expiration date is December 31, 2023.
However, on November 1, 2014, 60 days prior to the third anniversary date of January 1, 2015, the City issues a Notice of Nonrenewal. The contract expiration date is now fixed at December 31, 2023. Additional years are no longer automatically added to the contract term.
To date, the City has not issued any Notices of Nonrenewal, and no property owners have issued Notices of Nonrenewal. If the City were to issue such notices no later than November 1, 2023, all of the existing Mills Act contracts would expire on December 31, 2032.
The homeowners of the four contracts approved in 2022 would see a property tax benefit for 10 years, whereas the homeowner whose contract was approved in 2011 would see a property tax benefit for 20 years.
If the Council were to direct staff to issue a Notice of Nonrenewal on all 15 existing contracts, they would expire at the end of 2032 and the City would have zero Mills Act contracts, assuming the City did not enter into any additional contracts.
Potential Policy Restrictions
Following the October 4, 2022 City Council meeting, staff reached out to 73 jurisdictions throughout California to gather data on their Mills Act programs. A total of 40 responses were received. Of those, the majority did not impose any restrictions on properties seeking a Mills Act contract. Those jurisdictions include: Berkeley; Brea; Campbell; Chico; Chula Vista; City of Monterey; Encinitas; Fontana; Huntington Beach; Los Altos; Monrovia; National City; Oakland; Palm Springs; Placentia; Pomona; San Juan Capistrano; Santa Ana; Santa Monica; Truckee; Ventura; and Ventura County. Some responsive jurisdictions, including but not limited to Pacific Grove, Palo Alto and San Mateo, do not have active Mills Act programs. A minority of responding jurisdictions reported at least one restriction on either the annual number of contracts permitted; assessed valuation limits; land use limits; or tax revenue loss. A summary of these respondents and the applicable restrictions is provided in the table below and as Attachment 3.
Other Items of Interest
Completed/Largely Completed Rehabilitation Projects:
The current Mills Act Policy does not speak explicitly to whether a recently rehabilitated property may be eligible for what would effectively be a retroactive Mills Act Historical Property Contract. The Mills Act program is intended to be an incentive for private property owners to complete future, planned work. CMC 17.32.100.B.6.c.ii requires the Historic Resources Board and the City Council to make the following finding: The proposed rehabilitation/restoration and maintenance plan is appropriate in scope and sufficient in detail to guide long-term rehabilitation/restoration and maintenance.
However, there may be instances where the Council may wish to consider recently rehabilitated properties (rehabilitation projects completed within one year of Mills Act contract finalization) that do not require substantial future/additional rehabilitation work. Staff is seeking direction on whether the Mills Act Policy should be updated to specifically address this issue, or whether the Policy does not need to be updated because the current municipal code language is sufficient.
Application Fees & Inspections: The current application fee for a Mills Act Contract is $3,430. The fee is set at an amount intended to cover staff’s time processing and recording the application. Following approval and recordation of the contract, homeowners are required to obtain design review approval and/or building permits to carry out the improvements listed in their rehabilitation/maintenance plans. Fees are collected for those planning/building permit applications as appropriate, and the fees include the associated inspection costs for the work being performed.
Monterey County Tax Assessment Process: Upon approval of a Mills Act contract by the City Council, the contract is signed by all parties and recorded in the Monterey County Assessor’s Office. The County Assessor is tasked with the responsibility of calculating the property taxes in accordance with sections 439-439.4 of the Revenue and Taxation Code which states, in part, that restricted historical properties shall be valued based on a prescribed income capitalization method rather than on sales data (Attachment 4). Jerry Gatt, Monterey County Appraiser, attended the April 4, 2023 City Council meeting to answer questions about the assessment process; the meeting was recorded and is available to view online here.
Mills Act participants may realize substantial property tax savings. The State advises Mills Act applicants to expect (approximately) between 40% and 60% savings each year for newly improved or purchased older properties. Valuations of Mills Act properties are determined by the Income Approach to Value rather than by the standard Market Approach to Value. The income approach, divided by a capitalization rate, determines the assessed value of the property. In general, the income of an owner-occupied property is based on comparable rents for similar properties in the area, while the income amount on a commercial property is based on actual rent received. Because rental values vary from area to area, actual property savings vary from county to county throughout the State. In addition, as County Assessors are required to assess all properties annually, Mills Act properties may see variations in their property taxes each year.